Thursday, August 24, 2006

It's no secret here that I work in the real estate industry. It's also no secret that I'm not generally a big fan of most realtors, although I do have a friend or two who are realtors. They're not all idiots, but the pool does indeed have some pissers in it.

If you are one of the MANY people, particularly in Utah, who purchased a home in the last 36 months, but didn't have one of the following:

down paymentdecent creditability to absorb the payment shock of a 30 year fixed rate mortgage

...you may be asking yourself if you should be thinking about a refinance. Well, maybe you should, and let me tell you why.

Point 1. This morning, the YIELD on the 10-year bond is at its lowest point since March of this year. Why do you care about the 10-year bond market? Because that is where your mortgage is. It's a bond, and it's in the bond market. Mortgage rates are tied to the yield on the 10-year bond. That means mortgage rates have been going down for about three weeks now. Did you know that?

Point 2. If you are in the situation described above, you probably financed close to 100% of your value, or purchase price. Currently Utah real estate is at the top of the list in appreciation in the US. (most parts of the country are dealing with the dreaded "bubble" - but not Utah at this point, and we won't for another 24-36 months) What does this mean? It means that although you have paid on a mortgage for 2 or 3 years, you probably have not paid down much of the original amount you borrowed, but with the appreciation rates the way they are right now, you probably have some equity that is "free" equity, or equity you didn't have to purchase - the result of simple appreciation.

So, what do these two things mean? It's simple. If, through appreciation, you now owe 80%, 85%, or even 90% of what your home is WORTH, you can probably get a BETTER mortgage on a long term fixed rate, as opposed to the short-term adjustable rate, that is at either a BETTER payment, or at least at the SAME payment you are now paying on an adjustable mortgage. While it might seem like you aren't improving your position (by lowering your payment), you are in fact definitely improving your position, because you are bringing stability to your situation, rather than staying in an adjustable rate loan that was used to finance 100% of the value when you did it.

Lenders like equity, and they reward equity, via RATE. Which is why you will get a better deal, ALWAYS, if you either PURCHASE equity with a down payment, or you LEAVE equity there if you refinance.

So, some numbers:

If you purchased a home 24 months ago, for 150,000, and had no down payment, which means you borrowed 150,000, you got a mortgage rate that reflected high risk, because if a bank has to foreclose on you, they have no equity to work with when they try to sell the home. They pass the risk on to you, in RATE.

Now, there is a good chance that now your home is worth 165,000, and through your 24 mortgage payments, you may have paid down maybe 1500 in principle. Which means you now "own" 10% in equity.

You can now refinance for 148,500, with a value of 160,000. That's 90% rather than the 100% you financed earlier. You can now get a 30 year fixed rate loan, with a good rate that will probably be equal to what you are doing now. The difference is this new mortgage is FIXED, rather than the ADJUSTABLE you were forced to take when you couldn't really afford to get a good mortgage at the outset. Remember, lenders reward equity, and they will like you a LOT better - ie: give you a better rate, because they now see less risk in you.

Now, remember, don't think about refinancing in terms of getting cash out on your equity. (many people think this is the only reason to refinance.) If you came to me for that ("cash-out"), you would have to show me some MASSIVE personal benefit to you in order for me to allow you to do that. Otherwise, I would tell you to take a hike. Beyond that, I would be looking to improve your mortgaged position versus your value, into a long term solution that would put you in a good place.